Chapter Summary

Key Points

  1. Describe the financial markets and the key financial institutions.

    • Firms use financial capital to buy and operate physical capital.

    • Gross investment is the total amount spent on physical capital in a given period. Net investment equals gross investment minus depreciation.

    • Wealth is the value of what people own; saving is the amount of disposable income that is not spent, and it adds to wealth.

    • The market for financial capital is a market made up of the markets for loans, bonds, and stocks.

  2. Explain how borrowing and lending decisions are made and how these decisions interact in the loanable funds market.

    • Other things remaining the same, the lower the real interest rate or the higher the expected profit rate, the ...

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